Tuesday, October 7, 2014

Economics
always assume that you can do only two things with your income (money), namely
consume (spend) it or save it. An interesting question is how about “burn” it?
Some may consider burning money as “spending” but it does not create the
multiplier effect as when money are actually spent.

The
more important matter is which one is more preferable? Spend or save? Parents,
particularly in Asian countries, will tend to advise their children to save as
much money as possible for rainy days. Government may prefer us to spend to
boost the economy. Through banking system, economist may assume saving equal
investment. The money households save in the banks will be lend to companies
for investment (consumption).

In
a macro-institutional-economics perspective, an important aspect is how the
government spends public fund. Is money being spend on essential economic “needs”
or just unnecessary “want”? “Needs” is something necessary for human to life a
healthy life. In economic sense, “needs” is necessary elements or conditions
for sustainable development. “Want” is some sort of emotional desire. Thus, it
can be related to “economic ego”, which function may be merely for
self-boosting.

Unfortunately,
the temptation to spend on “want” is way too strong to resist for developing
countries including Malaysia. To a paraphrase
the famous Nike’s slogan, Malaysia’s government’s “just spend it” attitude on
particular two aspects needs to be moderated. First aspect is unnecessary
financial burden spending on large public sector. Second is appetite on
building mega projects, perhaps for glory?

(i) Public sector costly responsibility

If
we take economic analysis as human anatomy, public sector is like our blood
vassals. It must not be too large or too small but must be efficient to enable
blood (economic activities) to circulate to all over our body (whole
economy/country). If public sector is getting too big, unnecessary spending is
required to support it. Worst case is this sector grows until become
“too-big-to-fail” and thus, becomes too costly to be downsized. Unfortunately,
Malaysia’s public sector is too big, but still can be downsized to a more effective
level with strong political will.

Based
on Table 1, Malaysia’s federal government’s expenditure is relatively higher
than all five selected Asian countries (Thailand, Singapore, Indonesia, Japan
and South Korea). It is relatively lower than selected European countries
(Germany, United Kingdom, Greece and Iceland), United States and Australia.
Nonetheless, this could be due to high social welfare expenditure for senior
citizen and unemployment benefit given by those Western countries but not
Malaysia. Therefore, Malaysia’s federal government spending is not relatively overly
high but there are two glaring aspects for improvement.

First
is compensation to employees (public servants) is too high. World Bank defines this
“compensations” as “all payments in cash (e.g. salary), as well as in kind
(such as food and housing). Malaysia’s compensation to public sector employees
is highest, comparable only to Singapore.

Table
1: Expenses and Cash Balance

Countries

Expense (% of GDP)

Compensation of employees (% of
expense)

Cash surplus/deficit (% of GDP)

2011/12

Average

2011/12

Average

2011/12

Years of deficit

Malaysia

21.65

18.83

29.45

27.85

(4.53)

14 out of 14

Thailand

20.98

18.10

37.15

36.55

(2.15)

4 out of 10

Indonesia

16.53

16.53

14.43

12.44

(1.67)

8 out of 8

Singapore

12.74

14.35

28.72

29.76

8.70

zero

Japan

19.39

17.36

6.32

7.24

(7.99)

8 out of 8

South Korea

18.90

17.90

10.12

10.91

1.69

zero

Germany

29.15

30.88

5.63

5.54

0.14

12 out of 14

United Kingdom

44.71

40.24

14.11

14.34

(5.80)

11 out of 14

United States

23.89

22.08

10.34

10.43

(7.52)

12 out of 12

Australia

26.35

25.57

10.52

10.40

(3.04)

5 out of 14

Greece

54.03

46.28

20.64

22.74

(9.40)

14 out of 14

Iceland

35.90

33.78

24.08

27.92

(3.41)

8 out of 14

Note: Average is from 1999 to 2012; number of years subjected to availability of data

Source: World Bank

However,
in term of public sector’s efficiency, Singapore is well known as much better than
Malaysia. Table 2 shows some analysis of Malaysia’s operating expenditure as
well as brief comparison with Singapore.

Table 2: Malaysia’s Operating
Expenditure Analysis

Malaysia (ratios)

2010

2011

2012

Total operating
expenditure to GDP (%)

21.02

22.38

23.87

Federal government
operating expenditure to total operating expenditure

Malaysia’s
total operating expenditure to Gross Domestic Product (GDP) is twice larger
than Singapore. In addition, the Malaysia’s figure has been rising in the three
years as shown in the table. Federal government expenditure takes up majority
share of total operating expenditure, rising from 79% in 2010 to almost 81% in
2012.

Does
those statistic implied that Malaysian public sector has becomes too big to
fail? Government may face serious negative consequences from public servants if
they try to downsize to force improvement of efficiency. The consequences may
vary from protest to loss of votes in general election.

Secondly,
the public administration also has various record of unnecessary and/or unaccountable
spending. Various yearly Auditor General’s Reports highlighted various
unnecessary (and/or unaccountable) spending that included projects delay, cost
overrun, assets missing and over-priced purchases. Five general weakness that causes lots of unnecessary
spending by public administrators being mentioned in Auditor General’s Report
2102 were “improper payment”, “work or
supplies not according to specifications, low quality or inappropriate”, “unreasonable
delays”, “wastage”, “weakness in management of products and assets”. These
inappropriate spending is waste of public funds that can be used to develop the
economy. Yet, why we want to keep on “just spend it” whenever is it regarding
public sector?

(ii) Builds mega projects for glory?

Mega
projects in Malaysia was cheers by Michelle
Gyles-McDonnough, the United Nations System’s Operational Activities as “important
and would indirectly enhance labour productivity within the domestic workforce”.
Nonetheless, not all mega projects are necessary or important.

There is a story goes like this. Once upon a time, astronauts
in space cannot use their pen to write because zero-gravity effect. Then,
country A spend lots of money and time to research on solution and new pen that
can write on zero-gravity. In contrast, Country B immediate solved it by a
simple, cheap and fast solution – use pencil to write.

Applying the moral of the story, are we having no more
under-utilized buildings to become Matrade exhibition center instead of
building a new one? From cost-benefit perspective, some mega projects do not
justify high amount of money spent on them. One may question whether Sepang
International Circuit, Warisan Merdeka Tower and Angkasawan Program are needs
(necessary) or want (for ego). How these projects can enhance our labour
productivity or welfare? Given that Bukit Bintang area already well-known and
there are so many other shopping attractions in Klang valley, is there also a
need for Bukit Bintang City Centre?

On a smaller scale one may frequently see very good condition
roads being “re-furnished” again and again. Will money be better spent to
upgrade soil road in suburban areas? Will losses on
government-linked-mega-companies better utilized on other development projects?
Not all but there are few gardens in Putrajaya and around Malaysia need plenty
of money to build and maintain. Do these gardens have many visitors
consistently to justify the cost spent?

On the other hand, there are some mega-projects where money
is well spent. High cost on five economics corridors (Iskandar Malaysia, NCER,
ECER, SCORE and SDC) and MRT Project could be justifiable by huge benefit to
the economy and society in future. Nonetheless, progresses of those corridors
are to be seen. MRT is built to ease traffic congestion on the road. However,
some MRT proposed stations are not near town, hence defeating its purpose to
provide convenience transport.

Conclusion

Having million or billion of public fund sitting idle in the
treasury is not a good practice for any level of government, be it federal,
state or local council. Yet, over-spending too much until public debt
accumulated is even worst. Since long time ago in ancient Western Zhou Dynasty,
its government followed public finance management principle “to limit
expenditure in accordance to income”. Thus, please don’t “just spend it”. Instead, spend public
fund prudently and on economics “needs”, not “want”.

[Chinese version published at Nanyang Press, 6th October 2014. Available online at http://www.nanyang.com/node/654057. This English version may be slightly different from the Chinese online/printed newspaper version]

All
of a sudden, countries around the world are awakened from the nightmare of
dwindling population growth rate. Current population growth rates are seen too
low. In contrast to the mid 1960s to mid 1990s era, rapid population growth
rate has coined phrases like “Generation-X”, “Generation-Y” and “baby boomers”.
During those years, especially in 1990s, South East Asia, Korea and few other
countries see “miracle” economic growth in thanks to increasing labor supplies.

Statistics
from the World Bank show that population growth rates for year 2013 are lower
than average between 1960 and 1990 for all 14 Asian countries selected (see
Table 1). Relative lower population growth rate also recorded in 11 out of 14
other randomly selected non-Asian countries. Australia and Germany do not show
significant different while United Kingdom recorded positive percentage
changes.

Table
1: Selected Population Growth Rates

Country

Average I (1960 -
2013)

Average II (1960 - 1990)

Average III (1991 -
2013)

2013

ASIA

China

1.35

1.77

0.78

0.49

Hong Kong

1.65

2.14

1.00

0.46

India

1.93

2.19

1.59

1.24

Indonesia

1.96

2.34

1.46

1.21

Japan

0.61

0.96

0.13

(0.17)

Korea, Rep.

1.34

1.83

0.69

0.43

Lao PDR

2.19

2.31

2.03

1.85

Malaysia

2.45

2.69

2.13

1.62

Philippines

2.51

2.88

2.01

1.73

Qatar

7.22

7.68

6.59

5.60

Saudi Arabia

3.68

4.55

2.50

1.89

Singapore

2.32

2.19

2.49

1.62

Thailand

1.71

2.44

0.74

0.34

Vietnam

1.79

2.12

1.33

1.05

OTHERS

Australia

1.54

1.71

1.32

1.78

Brazil

1.93

2.42

1.27

0.86

France

0.67

0.77

0.53

0.53

Greece

0.53

0.66

0.36

(0.55)

Germany

0.20

0.31

0.06

0.24

Netherlands

0.74

0.91

0.51

0.29

New Zealand

1.14

1.15

1.12

0.85

Russia

0.36

0.73

(0.14)

0.22

Spain

0.81

0.82

0.80

(0.24)

Sweden

0.47

0.45

0.50

0.77

Switzerland

0.81

0.82

0.81

1.05

Turkey

1.90

2.25

1.42

1.26

United Kingdom

0.38

0.30

0.49

0.63

United States

1.07

1.10

1.03

0.72

Source:
World Bank; highlighted are the so-called “miracle economies” of the 1990s

Malaysia
population growth rate for 2013 is mere 1.62, which is 1.07 percentage point
lower than its population boom years of 1960 to 1990. Is Malaysia’s National
Population Policy (1984) to reach 70 million populations by 2100 still ongoing
or already been forgotten? Does high population compatible with current
Malaysia’s Economic Transformation Policy (ETP)?

Population Control Policies U-Turn

The
most stringent population control policy is China’s one child policy which is
established in 1979. In November
2013, the Chinese government relaxed the policy by allowing families to have
two children if one of the parents is an only child.

Singapore also makes a U-turn. To counter rapid
population growth after World War II, Singapore promoted anti-natal policies
known as “Stop at Two” (two children family) as well as sterilization during
1960s to 1970s. In the 1980s and thereafter, they completely reversed the population
control for “Have Three of More children if you can afford it” program,
“Graduate Mothers’ Scheme”, “National Night” on 9th August 2012 for
couples to have babies as their civic duty as well as various incentives. Lack
of citizen is believed to be among the main reasons Singapore economy being
over-dependent on supply of foreign labors especially from Malaysia and China.

South Korea also implemented population control policy from 1960s to 1990s but has it U-turned in the 2000s. In the 1970s, its government urged their citizens to have only two children so that they can raise them well and avoid poverty. This was further tightened in 1980s with slogan of “let’s just get one child and raise him/her well”. Dramatic U-turn was announced in September 1994 that seen its population policy slogan in the 2000s changed to “Papa, I don’t want to be alone. Mom, please have my younger sister or brother”.

Malaysia population policy also made U-turn. To
curb high fertility rate in the 1960s, National Family Planning Act (1966)
No.42 and National Family Planning Board were established to bring down
population growth rate from 3 percent in 1966 to 2 percent by 1985. Yet, from
the World Bank statistics, these policies seem less effective. In 1984,
Mahathir replaced family planning with the National Population Policy that
targeted 70 million populations by 2100. Given World Bank’s estimation of
Malaysia’s current population at 29,716,965 and year 2013 growth rate of 1.62%, this target is easily.
To be exact, we will achieve 70.78 million populations by about 54 years from
2013 or year 2067.

Big Population: ETP’s Sweat Dream?

Economic Transformation Program (ETP) did not
specifically plan for high population. However, it has highlighted concern that
Malaysia’s relative small population could limit the number of areas that its
economy can specialize in and be truly globally competitive. Big population
particularly in Greater Kuala Lumpur (estimated to approximately
6 million) is expected to create economic
agglomerations that contributes about RM263 billion (30% of total) to the
nation’s GNI.

Figure 1: GDP growth vs. Population growth, Average 1960 - 2013

Figure 1 plots average GDP growth rate against
population growth rate for the selected countries as in Table 1. China, South
Korea and Philippines are excluded as they are outliers. The figure and
statistical interpretation reveal that average population growth rate explained
77.6% of average GDP growth rate. It also shows a positive relationship, hence
justifying hypothesis that claims the 70 million population policy can help
boost economic growth.

To support rapid expansion towards achieving
developed nation status by 2020, Malaysia needs great amount of skill labors
both from within and abroad. Huge domestic market base provide economies of
scale as enjoyed by country like China also crucial to achieve many Entry Point
Projects (EPP) of ETP.

In addition, ETP has even prepared itself for
possible aging population. For example, under “Healthcare” National Key
Economic Area (NKEA), three of its Senior Living EPPs already planned mobile
healthcare service, institutionalized aged care and retirement villages for the
old folks. Thus, if our population keeps growing steadily, any aging population’s
negative effect can be minimized. In contrast, there will be more young people
energizing the economy with their new idea, consumption and labor supply.

Big Population Nightmare

The biggest nightmare from Malaysia’s 70
million population policy should be Malthusian trap. According to Thomas
Malthus, population increases are limited by subsistence and misery. On
subsistence aspect, food production needs to be increased. So far, Northern
Corridor of Economic Region (NCER) has been planned to boost modern and commercial agriculture.

However, Oliver De Schutter’s United Nations Special
Rapporteur on the Right to Food – Malaysia (visit date 9 to 19 December 2013)
do importantly highlighted some serious concerns. Quoted his report in length, Malaysia’s
food trade deficit grew from RM1 billion in 1990 to RM13 billion in 2013. The
country is self-sufficient in some food commodities, such as poultry
(self-sufficiency rate of 128 per cent), eggs (115 per cent) and fisheries (101
per cent), but not in others, such as rice (71 per cent), fruit (66 per cent),
vegetables (41 per cent), beef (29 per cent), mutton (11 per cent) and milk (5
per cent).

National Agrofood Policy 2011 – 2020 does focuses on the
issues of food security, competitiveness and sustainability of agrofood
industry as well as income level of agriculture stakeholders. Yet, do all our
efforts enough to ensure sufficient food for a greatly enlarge population in
near future? Many factors can further deteriorate food production such as
current unpredictable prolonged drought, fast mutating crops virus, food
wastage, haze, use of food for bio-fuel and loss of local interest in staple
food plantation due to urbanization and higher profit from commodities
agriculture like palm oil and rubber.

Not only food security, does the country create enough job
opportunity for the increased supply of labors? Will lots of labor from big
population hinder our production to move towards capital intensive to achieve
higher competitiveness?

Conclusion: The “70 million
Population” Puzzle

Having
big population is a puzzle as it comes with both benefit and detriment. On one
hand, big population may be a sweat dream to future economic growth. On the
other hand, unable to address the peril from big population, like food security
and job availability, may turn our dream into nightmare. Malaysia should put
more effort to mitigate the nightmare to ensure a sweat 70 million population
dream.

[Chinese version published at Nanyang Press, 8th September 2014. Available online at http://www.nanyang.com/node/647732. This English version may be slightly different from the Chinese online/printed newspaper version]